China Loses Rare Earth Export Restrictions Case at WTO

A WTO dispute panel has found that China’s restrictions on rare earths exports are in breach of global trade rules, in a highly-awaited ruling that focused heavily on how to balance natural resource policies with international trade obligations.

The restrictions cited in the dispute involve a series of duties and quotas that Beijing imposed in recent years upon the export of various rare earths, together with tungsten and molybdenum. China, the world’s leading producer of such minerals, had claimed that the limits were necessary to protect these exhaustible natural resources and the environment, given the extremely damaging impacts of the extraction process.

These 17 rare earth elements have unique magnetic, heat resistant, and phosphorescent properties and are crucial ingredients in the manufacturing process of many high-tech and green energy products, including wind turbines, engines for electric and hybrid vehicles, and medical equipment.

Despite a recent turn towards other sources such as Greenland and Australia, China is still responsible for 90 percent of all rare earths production, according to the US Geological Survey, while having just under a quarter of the world’s supply of these minerals.

The dispute was first lodged at the WTO in early 2012, with the US, EU, and Japan each submitting nearly identical complaints against the Asian economic powerhouse.

The group had argued that the Chinese export restrictions were aimed at increasing global prices of these minerals - which had spiked following the implementation of these measures - while also favouring domestic industry, rather than for the natural resource conservation goals that Beijing had outlined.

“China’s decision to promote its own industry and discriminate against US companies has caused US manufacturers to pay as much as three times more than what their Chinese competitors pay for the exact same rare earths,” US Trade Representative Michael Froman said on Wednesday.

Export duties: “No basis” in accession protocol

In its ruling, the panel found that there was “no basis” in the accession protocol that China had agreed in joining the WTO in 2001 for justifying the use of export duties under Article XX of the General Agreement on Tariffs and Trade (GATT).

Article XX establishes a number of justifications for otherwise illegal measures on the grounds that they are needed to fulfill greater public policy objectives, such as resource conservation or public health. Beijing had argued that this article justified the use of export restrictions, if deemed necessary to protect human, animal, or plant life and health.

The panel found that paragraph 11.3 of Beijing’s accession terms, which requires the Asian economy to eliminate all of its export duties, does not include any basis for justifying export duties by invoking the GATT Article XX exception. The finding was in line with a 2012 Appellate Body ruling on Chinese export restrictions on nine raw materials, which also found those measures to be WTO-illegal; Beijing had asked the panel to re-examine that finding in this case.

Notably, one of the three panellists reviewing the dispute disagreed with this assessment, arguing that China can indeed rely on Article XX for a possible exception. However, the dissenting panellist said that even if Beijing did have recourse to that article, it has not made a strong enough case to justify the use of these duties.

Panel finds export quotas unjustified

With regard to export quotas, the panel found that Beijing’s use of these measures appeared to be related more to its industrial goals, rather than to the conservation objectives that China had outlined in its defense.

Beijing had argued that it could involve Article XX(g), an exception that requires a measure to relate to the “conservation of exhaustible natural resources,” if these are “made effective in conjunction with restrictions on domestic production and consumption.”

The dispute panel did qualify that assessment by adding that WTO members can consider their industrial and developmental goals, together with conservation ones, in designing conservation policies.

Regarding Beijing’s claim that it has made efforts to also limit domestic production and consumption, the panel said that it was not able to conclude whether these attempts were, indeed, “restrictions.” Even if they were, they said, the burden of the country’s conservation policy is not split between foreign and domestic consumers in an “even-handed” way, as Beijing had claimed.